This is the third of five articles on public sector housing. I re-examine the history of public housing in Hong Kong andSingaporeto answer the intriguing question of why the two programs are so different. I shall also put forward policy recommendations to create a market for public sector housing units inHong Kong.

 

Every person who grew up in Hong Kong has been taught that after a 1953 Christmas fire in Shek Kip Mei, which left 53,000 immigrants homeless, the government in response initiated a policy to develop Resettlement Estates to house these stranded people. The program continued until eventually 224,000 such units were built. It is easy to conclude that a Christmas fire triggered the greatest humanitarian policy initiative in post-warHong Kong. This is of course part of the urban myth we all grew up with. At the very most it is only one of many relevant reasons possible.

 

Squatters Vs Old Tenement Blocks

 

From an economic perspective, why after the Second World War did private developers choose to build illegal squatter units on Crown land that sat on the fringes of the urban area, without government permission? Why didn’t developers build housing units in urban areas, especially through redevelopment of existing old tenement blocks that were overwhelmingly three to four storeys high?

 

The population ofHong Konghad increased rapidly from 600,000 to 2.3 million between 1945 and 1951; surely there was a large enough pressure on housing to make redevelopment economically worthwhile. Urban geographers from theUniversityofHong Kongwho surveyed housing conditions at that time found that old tenement blocks were far more congested than squatter units. Indeed Cantonese movies at that time correctly portrayed these conditions in their film shots – congestion in old tenement blocks and spaciousness in squatter units. Why did many of the 1,000 or so private developers at the time choose to construct illegal squatter housing units instead?

 

The answer is surprisingly simple. In 1947, shortly after the end of the war and in anticipation of the return of previousHong Kongresidents who had fled the city, the government imposed rent control on pre-war housing units. This effectively killed any possibility to redevelop the housing stock through private initiatives. As is well known from experience in all other parts of the world, rent control cannot hold down rents if the landlord can evict the tenant at the end of the contract and then raise rents with a new tenant. As a consequence, to make rent control effective, the law soon disallowed the forcible eviction of tenants. Once this happened, demolition of the existing housing stock for redevelopment purposes became impossible through private initiatives. Rent control basically halted urban redevelopment.

 

The old tenement blocks were packed with massive numbers of immigrants and returning residents. Most became sub-tenants. A small proportion of the new arrivals spilled over into squatter areas on the fringes of the urban areas by occupying land illegally. The government soon realized that development had become impossible because rent control had made it difficult to redevelop land within the urban areas and land on the perimeter was illegally occupied by squatters. The only politically feasible way to secure land for development was to resettle squatters into public sector housing units and reclaim the land they had occupied.

 

The Shek Kip Mei Christmas fire in 1953 provided an ideal opportunity for the government to introduce Resettlement Estates as a solution for dislocated households and to clear squatter areas. Table 1 shows the number of public housing units produced in the two periods 1954-1964 and 1964-1974.

 

 

Table 1: Number of Public Sector Housing Units Produced in 1954-1974

 

 

Number of Units

  1954-1964 1964-1974
Resettlement Estate      97,349    136,710
Government Low Cost Housing       5,544      62,102
Housing Authority      16,710      18,157
Housing Society       7,047      12,976
Total    126,650    229,945

 

 

In the first 10-year period a total of 126,650 units were produced, averaging 12,650 units per year. Of these, the largest share, 97,349, was made up of Resettlement Estate units. Admission into Resettlement Estates was not based on a means test, but due to the clearance of squatter housing areas. As a result, two perverse incentives were created. First, tenants admitted into the Resettlement Estates were not necessarily the lowest income groups in society. Indeed, some were able to afford the purchase of a squatter housing unit.

 

Second, once such a policy was in place many households living in crowded old tenement blocks now chose to become squatters with the expectation that they, too, would be resettled in time. The policy rewarded adventurous opportunistic households. Surveys of squatter settlements in 1957 showed that half of them had lived in private housing before becoming squatters. As a consequence, for each existing squatter area that was cleared, more new ones soon appeared. The number of squatters actually increased from 300,000 in 1954 to 600,000 in 1964.

 

Singapore Redevelops Rent Controlled Units

 

By ignoring economic means as criteria for allocating public sector housing, the Resettlement Housing program came under pressure for ignoring those without means. This led to the production of other means tested Government Low Cost Housing units. In 1964, following the publication of a White Paper with a 10-year public housing production plan, a more balanced approach to squatter clearance and means tested housing was introduced. A total of 229,945 units were produced, of which 62,102 were Government Low Cost Housing units, a huge increase from 5,544 in the previous decade. However, Resettlement Estates still took up the lion’s share at 136,710 units, or more than 65%.

 

These are pre-MacLehose era public housing production figures and they clearly reflect that the major goal of public sector housing policy in the first two decades was not chiefly to provide support for poorer households. It was to clear squatter areas for development. Other concerns like alleviating poverty, preventing social unrest, and humanitarian concerns were present but probably of secondary importance. The public sector housing program was a response to the consequences of rent control that prevented development from taking place, and to the program’s own perverse incentives that led to the further mushrooming of squatter areas which required renewed efforts to clear them.

 

The history ofSingapore’s public sector housing program took a very different course. In 1947,Singaporealso imposed rent control but this did not produce squatter areas because unlike Hong Kong there was no huge influx of immigrants intoSingaporein the post-war period. It also did not prevent redevelopment of rent controlled units. Why not? Between 1963 and 1965, when Singapore was part of the Federation of Malaysia, Article 13 of the Constitution of Malaysia provided that no person should be deprived of property except as specified by the law, and that no law should provide for compulsory acquisition without adequate compensation. In 1965Singaporebecame independent and immediately enacted a central piece of legislation for land nationalization called the Land Acquisition Act of 1966.

 

This ordinance conferred powers on the state to acquire land for any public purpose or for any residential, commercial or industrial purpose. An amendment in 1973 set compensation for acquired land as the market value at November 30, 1973 (the statutory date) or at the date of gazette notification, whichever was lower. The rate of compensation was thus independent of market conditions as well as the landowner’s purchase price. Subsequent amendments deliberately fixed the statutory dates so as to depress the rate of compensation to the landlord.

 

HOS Under MacLehose

 

What theSingaporegovernment did, but theHong Konggovernment avoided doing, was to take away the rights of property owners of private housing by forcing them to sell to the state at very low prices set by the law (not the market). In 1960, the state owned 44 percent of the land inSingapore. As a consequence, the effect of rent control in preventing re-development was offset. This exercise wiped out land value increases for affected landowners, some of whom suffered actual losses, having purchased their land at prices above the 1973 price. By 1985, the proportion of land under state ownership had increased to 76 percent. A considerable proportion of the land “taken” from landlords was used for constructing Housing and Development Board (HDB) units.

 

The decision not to take away the rights of private property owners inHong Kongreflected in part the influence of the capitalist free market philosophy of Cowperthwaite, who was not a socialist statist like Lee Kuan Yew. Cowperthwaite served as Financial Secretary from 1961-1971. Perhaps the bounded legitimacy of a colonial government in post-warHong Kongalso prompted it to tread more lightly on the rights of residents.

 

On the other hand,Singaporehad designed a public housing program that was far more market-oriented thanHong Kong. In an odd way this is not surprising. Having forcibly taken away the rights of private property owners under the Land Acquisition Act and offering them in return HDB units, theSingaporegovernment had to make these units sufficiently attractive. Allowing a market in HDB units enhanced the appeal of these units. WhatSingaporeended up doing was to replace large tracts of private housing stock with public blocks. Property rights were first taken away and then returned in another form. This is also why most ofSingaporeappears sanitized and sterile. OverallSingaporehad a far more big brother government.

 

MacLehose assumed Governorship in 1971 after a period of civil unrest following rapid economic growth in the territory and political turmoil across the border. He quickly recognized the stabilizing value of expanding the public sector housing program, as well as other initiatives in education, social services and health care. He made housing policy the centre piece of his first speech to the Legislative Council in 1972, calling for the construction of 350,000 units over a ten-year period. Ultimately a total of 176,623 Public Rental Housing (PRH) units and 23,020 Homeownership Scheme (HOS) units were constructed.

 

MacLehose essentially expanded the existing public sector rental housing program. As squatter areas were disappearing, the program metamorphosed into a means tested program for eligible households, delivered by the Housing Authority. But the large scale of the earlier resettlement program meant that households in public rental housing units would always be a mixture of former squatters and those who were without means at the time of their admission.

 

Housing Estates Limit Job Choice

 

The effect of such expansion was to bring an increasingly larger proportion of the population into the program. It led to the establishment of large public sector housing estates in satellite towns with multiple long-term consequences. The crucial one is that these inhabitants became immobile and nailed to their units in estates that were far away from choice jobs, choice schools, and relatives and friends. The inhabitants became essentially “housing serfs” who were bribed with low rent to accept their condition.

 

The HOS program was conceived under MacLehose’s tenure and reflected his recognition thatHong Kongresidents aspired to become homeowners. Such an aspiration could have been easily met in the 1970s by allowing existing rental units to be purchased by tenants at subsidized rates as was the policy inSingapore. This did not happen. Instead the new category of HOS units was created and kept separate from subsidized rental units. No consideration appears to have been given to uniting these two into a single program; a situation that implicitly assumed only households that improved their economic circumstances should become homeowners. The rest of public rental housing households – a significant 30.8% of all households inHong Kong– were condemned to remain tenants for life. The MacLehose housing program was poorly thought through in this respect. There was no attempt to harness the power of the market to meet the needs of households.

 

Just how poorly thought through the HOS program would became evident within a couple of years after its launch in 1978. Initially, the units were sold at a 30% discount from the market valuation, a boon for purchasers. The government originally intended to provide an explicit subsidy for HOS units with no requirement to repay the subsidy if the unit was resold subsequently on the open market after a 5-year period of occupation. The significance of such an arrangement was that it made the HOS owner a bona fide owner of the property.

 

But this arrangement was abandoned in 1982 after property prices in the market escalated rapidly. The 30% discount off market prices was no longer affordable for eligible households. As an alternative, the government decided to sell HOS units at development cost. However, the value of land was deemed unpaid and as a consequence the HOS unit could only be sold on the open market after the premium had been paid up, a figure that was estimated based on the market value at the time of the sales transaction. A 10 year occupation requirement was also introduced. These arrangements meant that the option to sell the HOS unit on the open market was conditional and was not often exercised. Thus, HOS occupants also become nailed to their units in the same way that PRH tenants were.

 

These two different HOS purchase arrangements meant that only those who purchased in the first two years of the program were bona fide owners, who could capture the appreciation in value of the unit they acquired. I reported in my article two weeks ago that the average market value of units inSui Wo Court, Phase I, Sha Tin andChun Man Court, Ho Man Tin, which were sold in those first two years, had appreciated by 18.2 times and 25.6 times respectively over their original sales prices. HOS purchasers who bought after 1981 were only pseudo-owners because they could no longer capture the appreciation of the property they purchased and effectively could not sell the unit as the unpaid land premium appreciated beyond their affordability.

 

Today 47.0% ofHong Kong’s households live in public sector housing either as renters or owners. But their rights as renters or owners are significantly less than those inSingapore’s Housing Development Block units because theHong Konggovernment has failed to create a market for public sector housing.

 

Creating Markets in Four Steps

 

It is not difficult to rectify the situation inHong Kong. The government can take four steps towards this:

 

First, reintroduce the Tenant Purchase Scheme (TPS) for all or most of the existing PRH units. The purchase price of these units should be set at the development cost of the units. The unpaid land premium should be set at a discount to the estimated market value at the time the units were completed; not at the value prevailing today or when the future transaction takes place.

 

Second, for all existing HOS units, the unpaid land premium should also be set at a discount to the estimated market value at the time the units were completed, again not at the value prevailing today or when the future transaction takes place.

 

Third, all future completed public sector housing units should be available either for rent or for purchase. Purchased units should not be resold or rented out on the market for a fixed period of 5 years. The purchase price of these units should be set at a rate that covers the development cost and a notional land price. The notional land price should contain an element of subsidy so that the total purchase price is affordable for eligible households. For example, a monthly payment that is less than half the amount of the household’s eligibility income. This subsidized purchase price could be paid at the time of purchase through a 30-year bank mortgage loan after a 10% downpayment.

 

Fourth, once public sector ownership units are up for rent or sale on the open market, eligible households who wish to purchase a resold HOS or TPS unit rather than being on the waiting list could receive a fixed grant from government to be applied to the purchase.

 

The above four measures would create a market for public sector housing units that is absent now. They would remove the arbitrary distinction between rental and homeownership programs. They would provide an explicit subsidy on land values to residents who wish to be homeowners. The new proposed measures will restore the homeownership ladder that has vanished in the past decade.

 

On 12 September in this Journal, Professor Liu Pak-Wai also spoke against reviving the old HOS scheme. I cannot agree with him more. It would be a total mistake to revive the HOS program and expand the PRH program in its present form. In my fourth article on the subject I shall consider the macroeconomic rationale for subsidizing homeownership as they relate to the characteristics of economic growth and fluctuations inHong Kong.

 

 

(3 of 5)

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5 Responses to Public Sector Housing Policies for Hong Kong and Mainland China – A Proposal for Hong Kong (Part III)

  1. Ern Chu says:

    I think the four steps to creating a market are really good. I was wondering if anything else would need to be done to prevent the market for private housing from affecting the prices of the HOS/TPS units. I assume that only HK permanent residents would be allowed to buy these unit, but I wonder if means testing need to be in place as well?

  2. At present there are already means testing so these should still be in place. It is entirely possible to insulate private housing prices from affecting the initial sales prices of the HOS/TPS units since it could be set administratively. For example if the prices are set so that a household can make a down payment of 10%, repayment period for the mortgage loan is 30 years, and the monthly payment is 50% of the eligible monthly income to qualify for HOS/TPS then it would be affordable. When the household is allowed to sell the HOS/TPS unit 5 years later it will be at an open market price and there is no unpaid land premium because it has been included in the initial sales price. This is the subsidy.

  3. Ern Chu says:

    Thanks Prof. Wong! I agree that if the means testing continue to be in place, it would make sure the HOS/TPS units will be able to reach those who need it.

  4. XU Zichen says:

    This is a huge fiscal transfer project. Is there any estimation on the required government spending on this project? The project could be better packaged and advertised so that it is easier to pass the legislature.

  5. There is no need for any additional resources. It only entails a change in the ownership arrangements. The government only needs to change the rules and regulations to allow the occupants to become owners with the right to sell those units they occupy on the open market without having to repay an expensive land premium, which they have to do so at present. If the land premium is reduced significantly then the occupants will have an incentive to sell those units when they have a better alternative use. The public sector housing units are already occupied by the existing residents. No body else can use the space and the land. And it is extremely unlikely that government or anyone else can get those units back from the occupants. So all the government has to do is to change the rules and regulations. It will not cost society anything other than the cost of changing the rules and regulations. Is this creating resources out of thin air? Almost, the value of the resources were lost when you impose restrictive rules and regulation. Liberalizing them would restore the value that was lost. Dr. Hernando de Soto undertook a similar exercise in Lima, Peru. He first got permission from government to set up a small work station with a few staff and a computer/printer and started printing land and housing titles for those squatters that lived in shanty towns on the outskirts of the city of Lima. In so doing their right to ownership of those illegally constructed premises was recognized by the state as legal titles. You can read about this in his book The Other Path.

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